The Research and Development Tax Credit

What is the Research and Development (R&D) Tax Credit?

Research and Development tax credits explained

Perhaps one of the more popular and challenging tax credits available is the Research and Development (R&D) Tax Credit.  In 1981 Congress created this tax credit as a way to encourage companies to be more competitive globally.  The Research and Development Tax Credit applies to any company (startups, small to mid-sized businesses, or large enterprises) that increases its qualified research spending.

How the Research and Development Tax Credit is Calculated

In Georgia, the tax credit is calculated as 10% of the additional research expense over the “base amount” of gross receipts.  The credit cannot be more than 50% of the business’ net income tax liability after all other credits have been applied in any one year.

Recent Changes to the Research and Development Tax Credit

In 2015, Congress agreed to make the R&D tax credit permanent by passing The Protecting Americans from Tax Hikes Act of 2015 (PATH).  Along with that decision came two major changes to the Research and Development Tax Credit.  Those changes are:

  1.  Legislation allows small businesses to apply the R&D tax credit against their alternative minimum tax (AMT).  An AMT is a federal income tax created in 1969 to make sure that people in a higher income bracket paid the minimum amount in taxes.  Both individuals and businesses can be subjected to an AMT.  This tax has been a major hindrance for startups and small businesses since its inception.
  2. For five years, small businesses can apply the R&D tax credit against their payroll withholding taxes.

Benefits of PATH for Startups and Small Businesses

The PATH Act of 2015 has given the ability for startups and small to mid sized businesses to compete with larger corporations.  Before this Act was passed, startups and small businesses had to wait until their income was at a certain level to take advantage of Research and Development Tax Credits.  However because of PATH, startups and small businesses that gross $50 million and less of their gross receipts can put the R&D tax credit towards their AMT.  Plus, any unused credit may be carried forward 10 years and can be used to offset withholding taxes.  It’s a great time to be  a startup or small business.